COMMENT: Azerbaijan in the fog

By bne IntelliNewsJuly 16, 2015

Michael Cecire of the Foreign Policy Research Institute -

For those paying attention, Azerbaijan has taken something of a beating in the press recently. From news of its economic woes, to revelations of the country’s increasingly authoritarian turn, to criticisms surrounding its recent hosting of the inaugural European Olympic Games, Azerbaijan has come a long way from its Caucasian tiger years of gangbusters economic growth and genuine optimism. Azerbaijan, it seems, is in a rut.

Azerbaijan’s turn in fortunes has coincided with increasing tensions between Baku and the West, and particularly the US, which has become a leading bogeyman for the regime. The powerful Ramiz Mehdiyev, the head of the presidential administration, has released a 60-page diatribe against the US and the West, accusing Washington of seeking to foment a “colour revolution” in Azerbaijan. Perhaps because of fears of Western machinations, a number of US and Western organizations have been shuttered by Azerbaijani authorities, including the Baku bureau of Radio Free Europe/Radio Liberty, the venerable International Relations and Exchange Board (IREX), and even the Peace Corps. Journalists and human rights activists, particularly those suspected of pro-West leanings, have been rounded up en masse since early 2014. And across Azerbaijan, reports regularly roll in about frequent security operations and crackdowns amid a deafening media blackout.

At the same time, Azerbaijan has pivoted over the last year and a half away from its longtime “multi-vectored” strategy – which favoured engagement with both Russia and the US ­– more decisively towards Moscow. Azerbaijani President Ilham Aliyev has praised Russia for “standing up” to the West, while Russian Foreign Minister Sergei Lavrov hailed Azerbaijan’s “balanced” position in Ukraine. Meanwhile, the two countries have been busily expanding military and economic relations, including ongoing arms sales and counterterrorism cooperation. What was once a carefully calibrated strategy that balanced relations with Washington and Moscow, has devolved into patterns of acrimony and increasing dependence, respectively.

The Azerbaijani regime clearly sees Western influence in the country as a threat to its rule. But there’s no good evidence that the US has any intention – or interest – in toppling Aliyev’s regime. Yes, the US has spent money on democracy promotion in Azerbaijan, which surely rankles the regime leadership, but much of this aid has actually been funnelled right into the pockets of the ruling elite – hardly a threatening statement of intent by the US. And, with only a few exceptions, US policy towards Azerbaijan has been remarkably light handed, even since its government launched its campaign against the West.

But there is a growing sense that a shift is occurring among Western governments towards Azerbaijan. Unfortunately, it is not necessarily because of Azerbaijan’s human rights record, or its increasing hostility to the West, or is growing closeness with Russia or Iran. Instead, the greatest factor in Azerbaijan’s waning star is the very thing that launched its global prominence (and keen Western attentions) in the early 2000s: energy.

Waning Value

While vast quantities of oil and natural gas have made Azerbaijan a coveted regional partner and elevated the geopolitical profile for the entire region, the rapid decline in energy prices over the last several years and the disruption of global energy markets are upsetting this calculus. Azerbaijani oil production peaked in 2010, and has been following a trajectory of steady decline since that point. This was always going to pose a problem to Azerbaijani authorities who, while they recognised that the country’s singular dependence on hydrocarbons exports would not last forever, saw it as a gradual and manageable problem. Optimism was buoyed by the prospect of increased natural gas production from the Shah Deniz II field, which would presumably help compensate for declines in oil revenues.

These hopes were dashed by the recent crash in energy prices which, while experiencing some modest recovery from a summertime uptick, are expected to remain low for the foreseeable future. And should the new Iran deal hold – an admittedly big if – that could put vast quantities of new hydrocarbon products on the markets, which would add further downward pressure on energy prices. Azerbaijan’s revenue shortfall has already had a marked impact on the national economy, which is further compounded by the effects of currency devaluation and falling remittances from Russia.

All of this is occurring against the backdrop of an international energy environment in upheaval. The US has re-emerged as an energy superpower and is now the world’s leading producer of both oil and gas. And with robust Canadian production, and the prospect of sector reforms in Mexico, North America is leading an international energy revolution, just as unconventional and alternative energy sources become increasingly viable. Azerbaijani energy, at this point, is a declining and increasingly superfluous input.

In mid-July, President Aliyev angrily complained about German and Council of Europe resolutions containing unfavorable language relating to Azerbaijan. “No one can dictate to Azerbaijan,” Aliyev reportedly railed. “We don't want anything from them, while they, on the contrary, need our gas, contracts, oil and our activity in this region.” Either Aliyev has been misinformed, or he is merely dramatically overstating the importance of Azerbaijani energy flows to Europe.

Even before recent fluctuations in global energy markets, Azerbaijan was never going to be much more than a bit player in the European diversification strategy. At their core, and despite their varying utility, grand strategies for ferrying Caspian hydrocarbons to Europe have been mostly a response to geopolitical demand, not economic demand. But diminished energy demand, resets in the global energy marketplace, and Azerbaijan’s increasing hostility to the West are upsetting Azerbaijan’s cherished, if somewhat short-lived, strategic “value proposition”. If it hopes to reclaim its niche, Azerbaijan will have to rethink its whole approach.

Finding New Mojo

If trends hold, Azerbaijan’s future looks clouded. The yawning gap between declining energy revenues and lavish state budgets is unsustainable, which will force Baku to chop spending. Increasingly distant from the Euro-Atlantic space, Azerbaijani dependence on Russia will deepen, and Iran is likely to figure more prominently in the country’s affairs. Multi-vectorism and the dream of strategic balance will be long forgotten, and the project of reintegrating the Azerbaijani territories occupied by Armenia will be cynically adjudicated in Moscow. Public unrest, as the economy falters and social welfare funding dwindles, becomes an increasingly common fixture. And Islamic radicalism, incubated by a gradual transformation into a virtual mukhabarat state, will have spread its tendrils across the country, building on the legions of homegrown Azerbaijani fighters returned from Syria and Iraq.

Things may come to pass this way, and they may not. But Azerbaijan’s position at the moment does look increasingly fragile, and its government does itself no favours by engaging in repression at home and burning its bridges with the West abroad. If Azerbaijan hopes to recover its momentum, it desperately needs to reinvent its national value proposition. Energy will likely always be a major strength for Azerbaijan, but it is increasingly insufficient on its own to preserve the strength and independent freedom of action that Azerbaijan has long held to be crucial to its national security and development.

Economically, Azerbaijan must make up for the lost time and money that should have been invested in diversifying the country’s economy away from its reliance on energy production. Transit is one notable and potentially opportune area where Azerbaijan may be able to find purchase. The prospect of Iranian energy coming online should motivate Baku to push for those hydrocarbons to fill Azerbaijani pipelines and railways. The nearing completion of the Baku-Tbilisi-Kars railway, and the wider expansion of Turkey-Georgia-Azerbaijan trilateral economic (and political) infrastructure, should help facilitate this opportunity.

It also presents a chance for Azerbaijan to find a niche in the much-ballyhooed New Silk Road concept, which bets heavily on the prospect of lucrative east-west trade flows across the Eurasian interior. While the efficacy of the New Silk Road remains an open question, China has already put its money where its mouth is to the tune of some $40 billion – a sum sizeable enough on its own to stimulate economic multipliers for the countries savvy enough to get on board. Next door neighbour Georgia is already getting in on the action.

But more importantly, Azerbaijan needs to reconfigure itself politically. The days of winning praise and prestige by virtue of its large proven oil reserves are rapidly coming to a close. Instead, Azerbaijan could make its regional mark by reversing years of rising authoritarianism and embracing real liberal reforms. Rebuilding a society that cherishes free expression, political accountability, and pluralism could help sap brimming unrest. Geopolitically, a freer Azerbaijan would be a trusted Western partner and, rather than another regional autocracy, would be part of a liberal bridge reaching into the Eurasian interior. Yes, it would take years, even generations, of tireless work, but even a noticeable turn could spark a new regional dynamic.

Tying Azerbaijani fortunes to Moscow would be a short-sighted proposition even without Russia’s dire economic outlook or its well-established record of dominating its smaller neighbours. But with the mutually reinforcing forces of state revanchism and economic isolation at full churn in Russia, Azerbaijan’s entente of convenience with the Kremlin is simply bad policy. Azerbaijan has grown much since it regained independence in 1991, but its potential as a regional power will never be realised until it reaches beyond its post-Soviet legacy.

Michael Cecire is an associate scholar at the Foreign Policy Research Institute's Project on Democratic Transitions.

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